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Procyclical and countercyclical fiscal multipliers: Evidence from OECD countries

Author

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  • Riera-Crichton, Daniel
  • Vegh, Carlos A.
  • Vuletin, Guillermo

Abstract

Using non-linear methods, we argue that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. In the case of OECD countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the “true” long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In extreme recessions, the long-run multiplier reaches 3.1.

Suggested Citation

  • Riera-Crichton, Daniel & Vegh, Carlos A. & Vuletin, Guillermo, 2015. "Procyclical and countercyclical fiscal multipliers: Evidence from OECD countries," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 15-31.
  • Handle: RePEc:eee:jimfin:v:52:y:2015:i:c:p:15-31
    DOI: 10.1016/j.jimonfin.2014.11.011
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal multiplier; Fiscal policy; Government spending; Fiscal shock; Procyclicality; Countercyclicality;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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